This ranking system offers valuable insights for investors and stakeholders interested in assessing the level of decentralization in different ecosystems.
Figure 1: The Decentralization Ranking can be found by clicking on the "Token" tap in the navigation bar.
The distribution of balances in wallets across various ecosystems follows a pattern known as power distribution. This pattern is often used to describe phenomena in fields like physics, economics, and social sciences. In a power distribution, the likelihood of an event is related to a certain characteristic of that event, such as its size or frequency.
Figure 2: The balance vs wallet resembling a power distribution
When we plot the power distribution on a log-log plot (Figure 2), it appears as a straight line. This is because the log of the likelihood of an event is related to the log of its size or frequency. The slope of the line gives us information about the characteristics of the distribution.
In the study of networks, node ranks also follow a power distribution. The slope of the log-log plot (Figure 3) can tell us about the number of centralized nodes in the network. This slope is referred to as the alpha parameter, which describes the distribution within a system. A higher alpha value means the system is more centralized, while a lower value indicates a more decentralized system.
Figure 3: LOG LOG of balance vs wallet
To calculate a decentralization score, we use these principles to evaluate the distribution of tokens in relation to the wallets holding them. We plot this distribution on a log-log plot and extract the "centralization score" or alpha parameter. This score provides information about the degree of decentralization in the system. We then rank different tokens based on their respective alpha parameters, which can be found on our website (Figure 1).
While decentralization is an important characteristic of a crypto project, it is not necessarily a reliable metric to determine the quality of the project. It's worth noting, for example, that successfully attracting investors results in accrued centralization to some extent. It allows for the resources needed to sustain the project's activities or to invest in security measures to protect against potential attacks.